Future global climate institutions

Posted on July 28, 2011 by admin

Alex Evans

Any framework for dealing with the climate crisis should be based on a scientifically derived stabilisation target. Such a framework should also distribute the global carbon budget among the world’s nations according to a transparent, equitable formula. To achieve this, global climate institutions will have to change.

In 2009, when David Steven and I embarked on a study for the UK government of future global institutions for tackling climate change, we felt that the world had spent almost nothing investigating the sort of global institutions we’d need in future in order to solve the issue. By comparison, millions of pounds had been invested in understanding the science of climate change — above all through the Intergovernmental Panel on Climate Change (IPCC) — and the economics of the issue, especially the Stern Review.

This, we thought, was surprising. In the past, whenever nations or peoples have faced an existential, systemic challenge, the new settlement that follows is almost always marked by new institutions. Think of how national sovereignty evolved out of Europe tearing itself apart in the Thirty Years War during the 17th century, or how the UN emerged, phoenix-like, from the ashes of the Second World War.

It’s already clear that climate change is the defining challenge of our age. Why then is so little thinking underway about the kind of institutions needed to solve it? It’s this nagging question that motivated us to produce our May 2009 paper “An Institutional Architecture for Climate Change”.

We were guided from the outset by two principles. The first was that we didn’t want to fall into the trap of thinking that institutions were the same as organisations. Instead, we liked Douglass North’s definition that institutions are “the rules of the game in a society or, more formally, the humanly-devised constraints that shape human interaction”. He continues: “institutional change shapes the way societies evolve through time and hence is the key to understanding historical change”. That sounded a good starting point to us.

The other principle we wanted to stick to was a really rigorous focus on function over form. As we know only too well, energy spent on reforming the international system all too often gets dissipated in setting up new organisations, closing them down, or otherwise trying to create some sort of perfect international organogram — without necessarily asking what it is we actually need international institutions to achieve.

So, those were the two principles underpinning our study. Which leads on to the question: what do we need international institutions to achieve on climate? David and I argue that the short answer to that question is that they need to send back signals from the future.

Let me explain that phrase. When you look at what determines how policy actors behave on climate change, you realise that how they act today is fundamentally determined by their expectations of what will happen in the future. So if countries — or companies, or citizens — expect a slow transition to a low-carbon world, then it makes sense for them to ‘free-ride’ internationally and to protect incumbents and vested interests. Moreover, given the long investment horizons involved, everyone shares an interest in predictability. If, on balance, people expect a slow transition, then it’s rational for them to reinforce that dynamic by seeking to slow the process down themselves. But if, on the other hand, perceptions tip to the other side — towards expecting a rapid transition to a low-carbon world — then a virtuous circle is much more likely to develop, because actors will have incentives to lead the change, nurture innovators and co-operate internationally.

Where institutions can make a difference, then, is by sending ‘signals from the future’ that shape people’s expectations. Institutions can give people confidence that we are going to solve this problem and, in doing so, create a self-fulfilling prophecy that brings about that very outcome.

This subtle feedback loop shows in microcosm a much wider point about where we are today in terms of international cooperation, with globalisation challenged not only by climate change, but also by the credit crunch, growing resource scarcity, the risk of protectionism and so on. As these and other stresses on globalisation increase, it’s likely that we’ll see either a significant loss of trust in the system, as globalisation retreats and countries focus on narrow, short-term national interests, or a significant increase in trust, as countries move decisively to increase their interdependence and invest in the institutions needed to make globalisation more resilient, sustainable and equitable.

Muddling through in some ways looks the least likely outcome. That’s why we argue that the issue of “signals for the future” is so important, and why we believe international institutions matter so much in this context. How do today’s climate institutions shape up?

Well, let’s start with the good news. Our institutional framework has a clear objective, set out in Article 2 of the UNFCCC: stabilise concentrations of (GHGs) at a safe level that avoids dangerous interference with the climate. That treaty also represents a pretty much universally agreed-upon reference point, with only Iraq, Somalia and Andorra not having ratified it.

Other items on the ‘credit’ side of the institutional ledger include the IPCC, which has been not only a neutral arbiter of the science but also a kind of anchor for the global conversation about climate change; Kyoto’s system of binding targets, plus cap-and-trade, for developed countries; some basic mechanisms for emissions abatement in developing countries, including the Clean Development Mechanism; and methodologies for countries to report on their emissions.

Unfortunately, these elements don’t add up to a clear signal back from the future. Here are a few reasons why not:

First, although we’ve defined stabilisation as the goal, our institutional framework doesn’t actually cohere with that end. We’ve neither quantified, nor even seriously discussed, the level at which GHG concentrations should be stabilised to avoid dangerous climate change, much less agreed a binding global ceiling on GHG levels in the air.

Second, Kyoto’s targets for developed countries weren’t in any way scientifically derived. Instead, they were based on countries’ own political and economic assessments of what they could manage.

Third, the lack of quantified targets for developing countries makes it impossible to forecast overall global emissions with any certainty. On top of that, there’s the problem of ‘carbon leakage,’ so in the UK, for instance, while production of GHGs fell 12.5% between 1990 and 2003, consumption of them grew by 19% over the same period. Why? In effect, it’s because the UK, like other rich countries, has ‘exported’ its dirty industries to the developing world, which then have to pay the cost of investing in clean technologies.

Fourth, Kyoto’s enforcement system is weak. Sanctions on countries that fail to meet their targets are weak; systems for monitoring, reporting and verification are ineffective; and there are no penalties on countries that refuse to join in the first place. Indeed, the fact that the US stayed out of Kyoto is likely to help it to generate a much more generous target this time around.

Fifth, there’s a similar lack of clarity on finance, adaptation and technology.

On technology, there are now numerous funds, but they lack clear terms of reference or a sense of exactly what they’re supposed to deliver. The amount of public R&D spent on energy, meanwhile, is half what it was 25 years ago.

On adaptation, debate is focusing more on the question of “how much?” than the question of “how?” National Adaptation Plans of Action are highly focused on short-term measures and far less on the challenge of really mainstreaming resilience through development programming.

On financing, there’s a lack of clarity over how financing flows on mitigation, adaptation and low-carbon technology cut across each other, and how they relate to other flows like development aid and private-sector investment.

And last but not least, there’s a lack of coherence between climate change and other key policy areas, such as trade, energy, food security, land use and economic stability.

Ultimately, for all that policymakers stress the scale of the climate challenge and the need for radical action, the fact remains that our current institutional set-up is saying something different. In effect, the signal actually being sent back from the future by today’s institutions is that:

The likely impact of climate change will be considerably less than that predicted by the IPCC.

The cost of reducing emissions far exceeds the benefits, while there is little need to insure against catastrophic impacts.

The needs of the poor should be given less weight than those of the rich.

All of which poses the question: what would it look like if we had an institutional framework that provided the opposite signal from the future — the unequivocal message that the world was clearly resolved to tackle climate change over the full term of the problem, and that individual countries, companies and citizens should position themselves to get out of carbon as swiftly as possible?

Let’s start by being clear about the three most fundamental functions for the system. It must:

Constrain emissions and manage sinks in a way consistent with stabilisation

Provide mechanisms to take account of equity, in both the mitigation and the adaptation contexts

Include enforcement mechanisms tough enough to make the regime effective and credible

So what might these mean in practice? Well, first and foremost, we think countries will need to agree a quantified, binding stabilisation target as the bedrock of the whole system. Today, we work from the short term — 5-year emission targets — out towards the long term: an aspiration of eventual stabilisation, at some unspecified level.

It’s time to reverse this trend and ensure that what happens today is driven by what needs to happen over the full term of the issue. A defined stabilisation target, like 450 parts per million CO2, would achieve that. And once we have it, we can use it to derive the size of a safe global emissions budget over the same period.

The next question is how to share out this budget. In the scenarios we did for the report, David and I argue that the only way that 192 countries are going to agree on the distribution of emission permits is through some kind of standard allocation formula to reconcile countries’ different equity claims. We call this “the Algorithm”.

At one end of the spectrum, emerging economies like China and Brazil want permits allocated in proportion to historical responsibility; at the other, many developed countries assume that ‘grandfathering’ permits in proportion to GDP is the only feasible approach.

Somewhere in the middle is a compromise, probably with allocations ending up on an equal per-capita basis at the end of a negotiated convergence period.

Even then, the problem with a per-capita allocation is that it’s impossible for developed countries to deliver in the short term, and a tough sell politically. At the same time, it’s also inequitable for poor countries, which receive a disproportionately small share of emissions while convergence to equal per capita equity takes place; these countries are also not rewarded for having low emissions prior to taking on targets.

Happily, there’s quite a lot that policymakers can do to increase equity. One is to make emission permits a tradable property right, so that emissions trading provides compensatory finance flows during the convergence period. Another approach involves directing resource flows through non-market mechanisms, like technology transfer. A third is resource flows for funding adaptation.

But we need to take a far more integrated approach to climate finance than we do today. At present, most of the push on financing is around making adaptation finance additional to the 0.7% of GNP target for development aid. And it’s far from clear to me how we put ourselves on strong ground by arguing on the one hand that adaptation is all about mainstreaming, while on the other insisting on separate financial flows.

More fundamentally, imagine what a truly global cap and trade system, coupled with an equitable allocation algorithm, could do for finance for development. Official Development Assistance is currently worth about $100 billion a year. Emissions trading markets are already worth two-thirds of that level a year — $64 billion in 2008, according to the World Bank — and they’re still in their infancy. Yet because they have no targets and hence own no assets, developing countries are missing out on these markets. Instead, they get the Clean Development Mechanism, which doesn’t deliver real finance for development or real emissions reductions. Such inequity is startling. You couldn’t make it up.

Finally, let me say just a word about enforcement. Our current set-up does not work — not on enforcing targets, not on penalising countries that stay out of the regime and not on checking that financial commitments actually get delivered.

In the long run, David and I argue that a climate deal will have to require an ‘all or nothing’ approach to international participation. Either countries play a full part in the system, and thus have access to international frameworks on finance, trade, development, energy and other resources, and perhaps even security; or they sit outside the international system and are effectively barred from all forms of international co-operation. Carbon default would therefore become as weighty an issue as sovereign debt default or failure to comply with a UN Security Council resolution. Right now, of course, such a scenario seems totally inconceivable, but it does indicate the extent of the shift in understanding that is still needed.

We certainly don’t claim to have all the answers about future climate institutions, nor does our report purport to be a full blueprint. Our aim is simply to start a broader, deeper, more engaged conversation about a dimension of the climate challenge that’s been seriously under-considered. This is also why we call for a ‘Stern Review’–type process to look at climate institutions much more comprehensively. Only when we embark on both of these can we begin to glimpse a real, workable model for our global institutions on the horizon.